1. Field of the Invention
The invention relates generally to valuation or appraisals of property. More specifically, the invention relates to a system and method for automated, appraiser-assisted valuation of real estate.
2. Description of the Prior Art
The mortgage lending industry makes loans to individuals based on several criteria including a valuation of the “subject property.” One of the principal steps in the decision of whether to make a loan and its appropriate amount (the “underwriting” of the loan) is the valuation of the subject property that will secure a promissory note and mortgage. In general, the value of the subject property that secures the lender's interest must equal or exceed the purchase price to which the buyer/borrower and seller agree in the contract of sale. As such, the real estate valuation is often a critical step in the mortgage lending process.
The typical valuation method is an “appraisal” of the subject property, performed by an appraiser who is certified or licensed within his or her state and/or locality. Appraisers are normally certified or licensed according to various state and federal laws, rules and regulations. Appraisers are generally qualified to do business as an appraiser under rules and regulations not only of the state or locality but also under the auspices of various certifying entities on a national or regional basis.
Appraisals today are typically of one of two types. The first is a “full” appraisal of the property. The second is a “drive-by” appraisal.
The “full” appraisal process, in general, is as follows. Within a few days of the loan application, a mortgage lender orders an appraisal of the property securing the mortgage. The lender orders this appraisal either directly from an appraiser, a corporate-owned internal management company, an external vendor management company, or through an “appraisal management company,” which then orders the appraisal from a residential real estate appraiser. The appraiser accepts the assignment and makes an appointment to inspect the interior and exterior of the property with its owners or their real estate agents. The appraiser's inspection of the property usually occurs between two and four days after the appraisal order is placed. The appraiser conducts a physical inspection of the interior and exterior of the property, notes any unusual or notable characteristics and measures each room (or at least the foundation dimensions) to arrive at the approximate square footage. The appraiser normally takes photographs of the exterior and, often, the interior of the subject property. Next, the appraiser evaluates the data and selects a number of comparable homes nearby to the subject property and takes photos of these. The entire inspection and picture-taking process can take from a few hours up to a full day.
The appraiser returns to his or her office and completes a side-by-side comparison of the subject property with those properties considered comparable that have sold and others that are on the market. In practice, the appraiser must often review up to a dozen comparable properties in order to select those that form an appropriate basis for comparison. Using an appraisal form that is satisfactory to the lender (commonly known as the Uniform Residential Appraisal report), the appraiser performs a thorough comparison of all the properties and completes a written report detailing factors including, but not limited to, size in square feet, condition, the existence of a garage, lot size, style, age, finish of interior, kitchen, bath, landscaping and others.
The appraiser uses the sales prices of comparable properties that have sold to establish a value for the subject property. The appraiser may also consider the existence of comparable properties that are presently on the market and the prices at which they are listed for sale. Finally, the appraiser considers the period of time that has elapsed between the sale of the comparable properties and the current date in adjusting the comparables' sales prices to that of the subject property.
This analysis is generally contained on an 8×14 inch double-sided document with approximately 114 different fields for data. Comments about the subject property and market are added where the appraiser considers these to be pertinent. The appraiser then signs the appraisal form and indicates a value for the subject property. The appraisal document must be produced in a form that complies with the underwriting guidelines of the lender or correspondent making the mortgage.
As many loans are sold from their primary lender to investors that aggregate and often scrutinize loans (“the secondary mortgage market”), the appraisal forms and methodology used normally must further comply with the requirements of the secondary mortgage market.
A “drive-by” appraisal, generally, is performed in a similar fashion to the “full” appraisal except that the appraiser does not conduct an interior inspection of the subject property. The drive-by appraisal is utilized in a variety of situations, such as where the credit or other risks attendant to the borrower of the type of loan are less, and thus the need for accuracy in the valuation process is deemed less. These situations and methodology are likewise dictated by and under guidelines set both by the secondary market and by individual lenders. In general, a drive-by appraisal takes significantly less time to complete (as the appraiser does not need to schedule an interior inspection of the subject property) and costs considerably less.
Generally, appraisers do not have either pictures or first-hand information on the interior of the property unless they take the time to physically inspect the interior. This fact often causes drive-by appraisals to be less accurate.
Currently, a full appraisal may generally cost from $250.00 to over $400.00, where such cost is nearly always passed on to the consumer by the lender. A drive-by appraisal currently may generally cost between $175.00 and $250.00. The elapsed time from placement of the order for a full appraisal to the lender's receipt of the finished document is generally 7-10 days. The elapsed time for a drive-by appraisal is generally 2-5 days.
Placement of the order from the lender to either the appraisal management company and/or the appraiser takes place by numerous methods including telephonic order, fax, e-mail, XML data feed or use of a web site. The method of communication of the finished appraisal to the lender by the appraiser is done either on a printed form (with attachment of photographs) or through an electronic form which is disseminated by e-mail or web site.
Over the past few years, methods have been introduced to value residential property in a fashion that is quicker and less expensive. All of these methods utilize publicly and privately available databases of the sales prices that have been obtained for prior sales of real estate. These methods; while somewhat different, each use a computer-generated model to match a subject property to several apparently comparable properties using only a “data match” comparison model (commonly known as the “automated valuation model” or “AVM”). The purpose of such database methods is to replace the use of the local appraiser with a database match method for generating a computer-produced value. This method provides for a rapid turnaround at a relatively low cost, currently $20.00-$40.00 per valuation. In terms of accuracy, however, computer driven valuations have thus far proven to be unreliable. In surveys of the lending industry, it has been demonstrated that as often as half of the time the AVM is more than 20% greater or less than the actual sales price of the subject property. The reasons for this are at least threefold:
(1) The model does not sufficiently recognize and adjust for local market characteristics;
(2) The variation in home values in a specified geographic area is too wide to be handled by the model's parameters (i.e., the existence of very expensive homes near moderately priced homes); and
(3) The model has too little data on the relevant market for automated adjustments to be statistically valid.
Further, one of the challenges for a typical AVM is the lack of attention to the nuances of the local real estate market. As an example, not every housing development is priced the same, or even within the same range from relevant market to relevant market. In addition, in older communities where homes may have historical value or have additional value due to a characteristic peculiar to that area, for example, a database model tends to less accurately reflect the true market value.
Due to accuracy issues, lenders have put model assigned valuations to only limited use. The result is that lenders are challenged to select between a full appraisal, drive-by appraisal or an automated valuation model. This creates a complex decision process requiring the lender to match the valuation method to the type of property, geographic area, and dictates of the secondary market. Further, projecting the costs of the type of valuation, in part to complete the required Good Faith Estimate, which is part of the lending process, is difficult. The lender must also contend with varying forms of ordering and receipt of valuation documents.
What is needed is a system by which a lender, or other party desiring a valuation, can obtain one quickly, cheaply and accurately, preferably by electronic means such as the Internet and associated systems.